Let Go the Status Quo

April 29, 2005 • Commentary

In defending the Social Security status quo, many liberal commentators take inconsistent positions.

The fact is that the promised benefits of the current system are simply not payable. If no policy changes are made until 2042, current laws specify that benefits must be slashed by 25 percent in the year 2042, and the cuts will have to be gradually deepened each year thereafter — growing to 31 percent by 2080.

The liberal spin is: “There’s nothing wrong with the current system. Benefits can be paid until 2042. And, even after that year, there is enough money in the system to pay 75 percent of benefits.” This position appears to imply that liberals’ could live with such steep cuts when it came time to implement them.

But then, confronted by a reform plan such as the one put forth by Dr. Robert Pozen (chairman of the Boston investment firm, MFS management), which would introduce progressive price indexing, they cry “This plan will unravel the system!”

The reason that these responses are inconsistent is, of course, that both lead to lower benefits in the future. Sure, the timing of benefit reductions is different: Under Dr. Pozen’s plan benefit cuts will commence sooner and, therefore, will have to be less steep in the future. But opponents argue that a shift to price indexing will leave future beneficiaries with the same living standards as today’s. If we are to believe liberals’ defense of the current system, however, the same would be true under the status quo as well.

Liberals’ different tacks on price indexing versus maintaining the status quo reveal that their true intent is to postpone reforms for as long as possible. A prospective Niagara Falls‐​like cut in benefits is preferable to a reform whereby benefit cuts begin immediately. The calculation, of course, is that when the money runs out, lawmakers won’t have the nerve to face retired baby‐​boomer voters’ wrath by cutting benefits. Taxes must then be increased, resulting in an expanded (but not more useful) system: So what if it imposes yet heavier burdens on generations to follow.

The cynicism of the liberals’ strategy ratchets up to yet another level when personal accounts are brought up. Essentially, personal accounts would help participants clearly distinguish between that part of today’s 12.4 percent payroll tax that is a pure tax and the part that constitutes true retirement saving. The latter would be returned as retirement benefits and the former would go to pay for our generosity to previous retirees.

The strongest but least appreciated advantage of personal account reforms would flow from clarifying that participants pay less than 12.4 percent of their earnings in pure taxes. The appreciation that taxes are lower than it appears at present will spur labor market participation, increase output, and improve the economy’s capacity to pay future retirement benefits.

Liberal critics, however, refuse to acknowledge that personal accounts would be a part of Social Security and not independent of it. Rather than destroy support for Social Security, personal accounts will strengthen the system’s finances by ensuring that funds meant for retirement are effectively sequestered and invested — unlike under the current system where they are deposited with the federal government and entirely consumed for non‐​Social Security purposes.

Also ignored by liberals is that personal accounts can catalyze an earlier reform: Early action is needed because postponing policy changes would increase the system’s cost. Because personal accounts would provide future benefits with highly desirable features–ownership, control over retirement finances, and bequeathability — that the current system fails to deliver, many younger participants would be willing to accept the cuts in future benefits necessary to make the system sustainable.

Those who stand in the way of personal accounts are only helping ensure that Social Security becomes a net drag on our well being rather than a means to a more prosperous future.

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